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Concord Coalition worries Bush tax cut will endanger Senior promises Jan. 13, 2003 - The Concord Coalition, a "nonpartisan, grassroots organization advocating fiscal responsibility while ensuring Social Security, Medicare, and Medicaid are secure," has issued a statement on four questions that concern them about the tax cuts proposed by President Bush. One of the four expresses concern about the prospect of big deficits just as baby boomers are reaching retirement age. The Statement Follows: President Bush has unveiled a major new tax cut initiative that Administration officials estimate will reduce revenues by $59 billion this year and by $670 billion over 10 years. To evaluate whether the plan is properly balanced between fiscal stimulus and fiscal discipline, four questions should be answered:
Are the new tax cuts justified by a new and more favorable reassessment of the budget’s long-term outlook? Absolutely not. All of the recent reassessments have shown a rapid deterioration in the budget outlook. Because of the recession, the substantial decline of the equity markets, and last year’s tax cuts, revenue projections have plunged. And with America’s new war on terrorism, including the possibility of a war with Iraq, we may be facing an urgent long-lasting demand for new spending on national defense and homeland security. Two years ago, policymakers were looking at a 10-year $5.6 trillion surplus. According to recent CBO projections based on reasonable assumptions about where current policies are pushing the budget, a deficit ranging from $1.5 trillion to nearly $3 trillion over the next 10 years is distinctly possible - even if the Social Security surplus is included. The proposed new tax cuts would add roughly $900 billion in deficits to the 10-year outlook, including higher interest payments on the debt. Given a sluggish economy and the urgent need for increased national security spending, it is neither surprising nor inappropriate that the budget has gone back into deficit for now. The cause for alarm - and what makes the President’s new proposal problematic from a fiscal standpoint - is not the short-term situation but the prospect of large and growing budget deficits that once again threaten the nation’s long-term economic future. Moreover, this return of deficits for “as far as the eye can see” coincides with the lapsing of budget enforcement rules in Congress and the breakdown of a bipartisan consensus on fiscal policy. As policymakers prepare to debate whether they should accelerate many provisions of the 2001 tax legislation, they seem to have forgotten that these tax cuts were originally deferred in order to abide by an important long-term policy goal - running a budget surplus at least equal to the size of the Social Security surplus. The fact that this goal is no longer feasible in the near term is no reason to abandon it entirely. And it is no reason to consider major policy initiatives without also setting the sorts of priorities and making the sorts of hard choices that any honest budget process should require. Are the reductions advisable as short-term stimulus? Expert opinion is mixed on whether short-term stimulus is needed. Some believe that it would help the economy get through what Federal Reserve Board Chairman Alan Greenspan has called a “soft patch.” Many believe that the economy is recovering and will continue to do so with or without additional stimulus. Even the President has stated that the economy is “pretty darn strong.” To the extent that there is a problem, it is with near-term business and consumer confidence. This suggests that any new stimulus plan should be capable of swift implementation and targeted to have an immediate impact with minimal long-term costs. The President’s plan does not meet these criteria. Clearly, immediate stimulative impact is not the centerpiece of the overall plan. Less than 9 percent of the revenue reductions would occur in 2003. That 9 percent, amounting to around $59 billion, would only provide a small boost to the economy at a vast long-term cost. The bang is not worth the buck. Do the reductions improve the tax code’s overall efficiency? There is much to be said for the President’s desire to impose fewer tax penalties on savings and investment. Reducing or eliminating the “double taxation” of corporate dividends is worthy of consideration, although a more effective and equitable approach than making dividends tax free for individuals would be to make them deductible as a corporate expense. Such structural reforms, however, would only be beneficial as part of a revenue-neutral package. Reducing the taxation on dividends may marginally improve savings behavior—but not nearly enough to compensate for the loss in federal revenue, which adds directly to the federal debt and subtracts dollar-for-dollar from national savings in the long run. Many tax cut advocates seem to believe that debt is a painless alternative to taxes. The truth is that deficits merely shift the tax burden toward the future, while surpluses shift it toward the present. An efficient tax policy would require us to pay for some of the coming explosion in entitlement costs today—that is, it would require us to resume a path toward surpluses as the economy recovers. With the beginning of the baby boomer retirements in just 5 years, and increased costs for homeland security and a potential war in Iraq, do these new tax cuts make sense? The President’s proposed tax cuts must be evaluated in the context of long-term spending needs and revenue realities. That means looking at everything from Social Security, Medicare, and Medicaid to the demands of national defense and homeland security. How we balance priorities will ultimately determine America’s long-term tax burden—not whether Washington policymakers can muster the “courage” to hand voters another tax cut today. There is a case to be made for immediate short-term fiscal stimulus. There is also a case to be made for tax reforms that favor savings and investment, especially if they are part of a comprehensive plan that also encompasses long-term entitlement reform. However, no amount of fiscal stimulus or “pro-growth” tax cuts will come close to solving our nation’s most daunting economic challenge-the $25 trillion of unfunded federal government benefit promises that hangs like a millstone on the economic well being of future generations. If the federal government required itself to calculate amortization charges on its benefit obligations - and recognize those obligations on its balance sheet as the private sector is required to do - the annual charge would be roughly $1.7 trillion. This is a sobering perspective for policymakers weighing how much new debt to incur in the name of economic “stimulus.” The nation now faces two history-bending challenges: global terrorism and global aging. Meeting the first may require marshalling new resources far above the extra spending already legislated. We know that meeting the second will test the ability of society to provide a decent standard of living for the old without imposing a crushing tax burden on the young. America should not approach this fiscal gauntlet encumbered by deficits as far as the eye can see. To do so would be to ignore every principle of public finance, generational equity, and long-term economic stewardship. |
The Concord Coalition is a nonpartisan, grassroots organization advocating fiscal responsibility while ensuring Social Security, Medicare, and Medicaid are secure for all generations. The Concord Coalition was founded in 1992 by the late former Senator Paul Tsongas (D-Mass.), former Senator Warren Rudman (R-N.H.), and former U.S. Secretary of Commerce Peter Peterson. Former Senator Bob Kerrey (D-Ne.) was named a co-chair of the Concord Coalition in January 2002.
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